Executive Overview Supply chain leaders struggle to align corporate and supply chain strategy and drive improved performance. We term this difficult balancing act The Effective Frontier and explain it as the process of balancing growth, profitability, cycle and complexity within a company’s supply chain operations. A supply chain is a complex system with increasing complexity. A major gap in many supply chain strategies is a nuanced understanding of supply chain potential when these elements are viewed together as a system. The focus of this report is semiconductor and hard disk drive manufacturers. As seen in table 1, when it comes to supply chain performance, the industry is neither the best nor the worst. They fall squarely in the middle. While middle of the pack in operating margin, the industry has shown an increase in the cash-to-cash cycle and a decrease in inventory turns. With increasing complexity, the industry has struggled to maintain inventory turn performance over the period. Companies further back in the supply chain have struggled to a higher degree to balance The Effective Frontier than those closer to usage. This is largely due to the bullwhip effect—the distortion of a demand signal as it gets passed downstream from trading partner to trading partner. The chemical industry manufacturers, like semiconductor & hard disk drive manufacturers, are three to five levels back in the supply chain. Comparing the results in table 1 for the two industries illustrates how much better the semiconductor & hard disk drive manufacturers have done in a similar orientation. Operating margin is comparable across the two, but the chemical industry has a higher cash-to-cash cycle level and almost a 50% lower inventory turns value. Semiconductor and hard disk drive manufacturers have been successful in a challenging downstream position. Cost pressure from OEMS has not (as of yet) cut into margin, and growth levels have remained strong with the move to mobile. Inventory remains problematic with all six companies in this report, demonstrating increased DOI and decreased inventory turns, since the start of the century. Part of this is likely due to the lengthening of the global supply chain, while another part is partly due to rising product and process complexity, but it remains a concern. Historically, the industry has made strong gains on productivity. An increasing move towards automation in the precision driven manufacturing environment is expected to continue the rise in revenue per employee performance. In this report, we discuss the financial realities of the semiconductor and hard disk drive supply chain and offer recommendations for improvement.

1. Supply Chain Metrics That Matter:
Semiconductors & Hard Disk Drives
Using Financial Data from Corporate Annual Reports to
Better Understand Semiconductor & Hard Disk Drive
Manufacturers
2/18/2014
By Abby Mayer
Research Associate
Supply Chain Insights LLC

2. Contents
Research ................................................................................................................................... 2
Disclosure .................................................................................................................................. 2
Research Methodology .............................................................................................................. 2
Executive Overview ................................................................................................................... 4
Understanding the Industry ........................................................................................................ 6
Growth: Robust with High Demand ............................................................................................ 8
Profitability: Wide Margins .......................................................................................................... 8
Cycle: Rising Inventory Levels ................................................................................................... 9
Complexity: Increasing Automation ........................................................................................... 11
Recommendations ....................................................................................................................12
Conclusion ................................................................................................................................13
Company Profiles......................................................................................................................13
Other Reports in This Series: ....................................................................................................14
About Supply Chain Insights LLC ..............................................................................................15
About Abby Mayer .....................................................................................................................15
Copyright © 2014
Supply Chain Insights LLC
Page 1

3. Research
Supply Chain Metrics That Matter is a series of reports published throughout the year by Supply
Chain Insights LLC. They are a deep focus on a specific industry.
These reports are based on data collected from financial balance sheets and income
statements over the period of 2000-2012. In these reports, we analyze how companies made
trade-offs over the course of the last decade in balancing growth, profitability, cycles and
complexity.
Within the world of Supply Chain Management (SCM), each industry is unique. We believe that
it is dangerous to list all industries in a spreadsheet and declare a supply chain leader. Instead,
we believe that we have to evaluate change over time by peer group. In this series of reports,
we analyze the potential of each supply chain peer group, share insights from industry leaders
from each industry, and give recommendations based on general market trends.
Disclosure
Your trust is important to us. As such, we are open and transparent about our financial
relationships and our research process. This independent research is 100% funded by Supply
Chain Insights.
These reports are intended for you to read, share and use to improve your supply chain
decisions. Please share this data freely within your company and across your industry. All we
ask for in return is attribution when you use the materials in this report. We publish under the
Creative Commons License Attribution-Noncommercial-Share Alike 3.0 United States and you
will find our citation policy here.
Research Methodology
The basis of this report is publicly available information from corporate annual reports from the
period of 2000-2012 for publicly-owned companies involved in the semiconductor and hard disk
drive industry.
The financial ratios used enable supply chain leaders to better understand where the industry is
on the Supply Chain Effective Frontier. In this report, we share a framework for supply chain
excellence that balances growth, profitability, cycles and complexity metrics. In each Supply
Chain Metrics That Matter report, we share insights from each of these metrics categories. Due
to the fact that the supply chain is a complex system that must be managed holistically, we
share the trends on each of these dimensions over the course of the last decade.
Copyright © 2014
Supply Chain Insights LLC
Page 2

4. In picking companies for the Supply Chain Metrics That Matter report, we traditionally rely on
companies recently listed in the Fortune Global 500. For the semiconductor & hard disk drive
industry, we identified 6 companies using the Fortune Global 500, the Morningstar peer group
and NAICS codes 1 to inform our decision.
We use the financial data to help readers learn from past trends, to better understand current
operating environments, and we provide recommendations for the future. We augment the
financial data analysis with information from our quantitative and qualitative research studies as
well as our work with clients operating within the industry.
1
All peer group companies profiled in this report were classified in one of two separate NAICS codes:
334413 and 334112.
Copyright © 2014
Supply Chain Insights LLC
Page 3

5. Executive Overview
Supply chain leaders struggle to align corporate and supply chain strategy and drive improved
performance. We term this difficult balancing act The Effective Frontier and explain it as the
process of balancing growth, profitability, cycle and complexity within a company’s supply chain
operations.
A supply chain is a complex system with increasing complexity. A major gap in many supply
chain strategies is a nuanced understanding of supply chain potential when these elements are
viewed together as a system.
Figure 1. The Effective Frontier
The focus of this report is semiconductor and hard disk drive manufacturers. As seen in table 1,
when it comes to supply chain performance, the industry is neither the best nor the worst. They
fall squarely in the middle. While middle of the pack in operating margin, the industry has shown
an increase in the cash-to-cash cycle and a decrease in inventory turns. With increasing
complexity, the industry has struggled to maintain inventory turn performance over the period.
Companies further back in the supply chain have struggled to a higher degree to balance The
Effective Frontier than those closer to usage. This is largely due to the bullwhip effect—the
distortion of a demand signal as it gets passed downstream from trading partner to trading
partner. The chemical industry manufacturers, like semiconductor & hard disk drive
manufacturers, are three to five levels back in the supply chain. Comparing the results in table 1
for the two industries illustrates how much better the semiconductor & hard disk drive
manufacturers have done in a similar orientation. Operating margin is comparable across the
Copyright © 2014
Supply Chain Insights LLC
Page 4

6. two, but the chemical industry has a higher cash-to-cash cycle level and almost a 50% lower
inventory turns value.
Table 1. A Review of Industry Progress from 2000-2012
Semiconductor and hard disk drive manufacturers have been successful in a challenging
downstream position. Cost pressure from OEMS has not (as of yet) cut into margin, and growth
levels have remained strong with the move to mobile. Inventory remains problematic with all six
companies in this report, demonstrating increased DOI and decreased inventory turns, since the
start of the century. Part of this is likely due to the lengthening of the global supply chain, while
another part is partly due to rising product and process complexity, but it remains a concern.
Historically, the industry has made strong gains on productivity. An increasing move towards
automation in the precision driven manufacturing environment is expected to continue the rise in
revenue per employee performance.
In this report, we discuss the financial realities of the semiconductor and hard disk drive supply
chain and offer recommendations for improvement.
Copyright © 2014
Supply Chain Insights LLC
Page 5

7. Understanding the Industry
Financial results culled from NAICS classifications are shown in table 2. Inventory turns are
down and revenue per employee performance is up for both of the peer groups. The results on
the remaining metrics are more mixed.
Table 2. Semiconductor & Hard Disk Drive Industries (2000-2012)
While every industry has a unique set of challenges and opportunities when it comes to
maximizing potential and creating better functioning supply chains, the semiconductor & hard
disk drive industry has special challenges. We examine several of those limiting factors here
and then begin analysis of six companies within the peer group for a more close-up
understanding of their financial performance over the preceding decade.
•
Competition. Commoditization is a serious challenge, especially to semiconductor
manufacturers. Providing the hardware is no longer enough. Building a brand presence,
with a focus on additional services including software, is a necessity for success moving
forward.
•
Longer Supply Chains. Many semiconductor facilities have moved outside of the U.S.
creating a longer supply chain stretching across geographies and leading to increased
transit times. This increases the number of links in the supply chain creating
interdependencies. It also creates a domino effect—an industry which can be easy to
topple and hard to restore. The Thailand flooding in the fall of 2011 was a prime example
of these challenges. The impact of the Thailand natural disaster rippled up to large
consumer-facing businesses like Dell and Apple. Seagate Technology PLC
summarized the situation the following way in their 2013 annual report.
Copyright © 2014
Supply Chain Insights LLC
Page 6

8. "In early October 2011, floodwaters north of Bangkok, Thailand
inundated many manufacturing industrial parks that contained a
number of the factories supporting the HDD industry's supply chain.
The HDD industry had concentrated a large portion of its supply chain
participants within these industrial parks in an effort to reduce cost and
improve logistics. As a result, the inundation of floodwaters into these
industrial parks had caused the closure or suspension of production by
a number of participants within the HDD supply chain. During the
supply chain disruption in fiscal year 2012, we believe demand
exceeded supply due to the impact from the flooding in Thailand,
resulting in an increase in the average selling price ("ASP").
• Seagate Technology PLC 2013 Annual Report, p 44
•
Short Product Life Cycles. The semiconductor industry has always operated on a
highly cyclical cycle. This is best explained by the excerpt below from the 2012 annual
report of Texas Instruments, Inc.
"The “semiconductor cycle” is an important concept that refers to the
ebb and flow of supply and demand. The semiconductor market
historically has been characterized by periods of tight supply caused by
strengthening demand and/or insufficient manufacturing capacity,
followed by periods of surplus inventory caused by weakening demand
and/or excess manufacturing capacity. These are typically referred to
as upturns and downturns in the semiconductor cycle. The
semiconductor cycle is affected by the significant time and money
required to build and maintain semiconductor manufacturing facilities."
• Texas Instruments, Inc. 2012 Annual Report, p 42
This creates ongoing challenges as there is no stable status quo for which companies
can innovate towards. This is likely to continue to be a challenge moving forward.
•
Margin Pressure. Many semiconductor and hard disk drive companies operate in the
shadows of well-known brand names such as Hewlett-Packard, Apple, Dell and others
with strong procurement practices. As a result of their downstream location, these
companies are likely to experience cost pressure from upstream suppliers. This is similar
to the relationship chemical companies have in relation to consumer packaged goods
manufacturers and retailers. Pricing pressure is often passed down the line to the low
tier suppliers.
The challenges are clear, but we find much to be optimistic about when it comes to supply chain
management for semiconductor and hard disk drive manufacturers.
Copyright © 2014
Supply Chain Insights LLC
Page 7

9. Growth: Robust with High Demand
Growth levels for semiconductor and hard disk drive manufacturers have been strong over the
past decade. The downturn in the economy due to the recent recession hit the industry hard.
Product innovation is a major driver of growth. The growing demand for consumer electronics
devices, and the proliferation of mobile and tablet products, drove a strong market for these
products. The number of active cell phones is expected to top 7.3 billion by the end of 2014,
according to the International Telecommunications Union. 2 In short, the number of cell phones
will exceed the global population at some point this year. The growth levels for the profiled
companies are shown in table 3.
Table 3. Year-Over-Year Sales Growth (2000-2012)
Product innovation is the lifeblood of this industry. Strong planning processes enabled
adaptation in the face of extreme supply and demand volatility.
Profitability: Wide Margins
Along with significant year-over-year growth, most manufacturers in these industries have
enjoyed the luxury of large operating margins. As discussed earlier, because of their
downstream position in the supply chain, they are at a disadvantage. However, they have
2
Silicon India Magazine. World To Have More Cell Phone Accounts Than People By 2014.
http://www.siliconindia.com/magazine_articles/World_to_have_more_cell_phone_accounts_than_people_
by_2014-DASD767476836.html
Copyright © 2014
Supply Chain Insights LLC
Page 8

10. bucked the trend due to excellence in product innovation and supply chain planning functions. It
is simple. The industry is an outlier in operating margin. Not only are the margins comfortably
large, they are also increasing post-recession. Each company has increased operating margin
over the period from their starting results in 2000-2006 compared to their most recent three year
period (2010-2012). The current results are shown in table 4.
Table 4. Operating Margin (2000-2012)
Cost pressure originating at the end consumer is often pushed down the supply chain to
downstream suppliers cutting into their margin levels. Although we do not see this occurring to a
significant degree in these companies, it is a possibility to consider and prepare for. Improving
supply chain performance is one of the best ways for leaders to manage tightening margins.
Cycle: Rising Inventory Levels
The cash-to-cash cycle remains our preferred singular metric for grasping the larger picture of
supply chain performance within a company. This comes with one simple caveat. It is a
compound and complex metric. The cash-to-cash cycle is not enough alone to understand the
supply chain performance of any company. Instead, the components of the cash-to-cash cycle
tell a critical piece of the story. The cash-to-cash performance of the companies is shown in
figure 2.
Copyright © 2014
Supply Chain Insights LLC
Page 9

11. Figure 2. Cash-to-Cash Cycle (2000-2012)
The trend is clear. Cash-to-cash performance is up across the board for the companies. The
swings have stabilized in the more recent years, but are still positive. Financial analysis of the
components demonstrates that collectively, companies have seen a 12% decrease in days of
receivables and a 20% decrease in days of payables. This means that companies are collecting
receivables sooner and meeting payables obligations sooner.
Table 5. Days of Inventory (2000-2012)
Copyright © 2014
Supply Chain Insights LLC
Page 10

12. The only missing piece is days of inventory which increased by 34% over the period. The days
of inventory performance alone is shown in table 5. Table 5 illustrates that the inventory trend is
not a single company mismanaging inventory. It is an industry trend and driven by rising product
complexity. In fact, all 6 companies have grown their inventory levels since the 2000-2006
period. The lengthening of global supply chains has certainly contributed to a need for holding
larger inventory, but in our experience, most supply chain leaders believe they have made
significant progress on reducing inventory levels. The financial results tell a very different story.
While many have improved safety stock levels, they have increased cycle and in-transit
inventories. The result is a negative impact (and rising value) for days of inventory.
Complexity: Increasing Automation
Complexity has increased by orders of magnitude since the turn of the century and remains a
challenge for most companies. Broadcom Corporation summarizes the complexity as such:
"Our products are incorporated into complex devices and systems,
creating supply chain cross-dependencies. Accordingly, supply chain
disruptions affecting components of our customers’ devices and/or
systems could negatively impact the demand for our products, even if
the supply of our products is not directly affected."
• Broadcom Corporation 2012 Annual Report, p 15
Table 6. Revenue per Employee (K$) (2000-2012)
Copyright © 2014
Supply Chain Insights LLC
Page 11

13. In the area of supply chain complexity, we look at revenue per employee. It is both widely
available and easily comparable across industries. The results are shown in table 6.
The industry has made great strides in productivity. This is due to both automation and
outsourcing. The demanding and precision-heavy manufacturing process, coupled with the
need for sterility, makes these environments ideal for automation. As a result, we expect
continued growth in revenue per employee as increasing amounts of manufacturing are
automated and human labor is removed from the process.
Recommendations
The semiconductor and hard disk drive industries are better positioned than many of their peers.
However, they are not resilient. The Thailand flooding of 2011 was a serious wake-up call. Here
are our recommendations for continued improvement:
•
Focus on Relationships. There is uncertainty on both sides of the semiconductor and
hard disk drive companies. Supplier issues as well as increasing demands from OEMS
create a challenging environment. A focus on brand presence, increased capabilities
beyond hardware creation, and relationships will help to solidify the business model. The
design network of Taiwan Semiconductor Manufacturing Company and the delivery of
value-added services is an example of creating stickiness in relationships.
•
Drive Innovation. In order to avoid commoditization, semiconductor and hard disk drive
companies should focus on expanding their capabilities from hardware creation to an
arsenal of service offerings focused on software and mobile design needs. This requires
tight integration of new product and supply chain processes.
•
Focus on Inventory. Lengthening global supply chains have resulted in climbing
inventory numbers. Cash flow is key and improvement in days-of-payables and days-ofreceivables management have been negated by climbing inventory stores.
•
Explore Automation. The manufacturing needs of semiconductors and hard disk drive
manufacturers make automation a core portion of the business. Use more advanced
concepts in digital manufacturing coupled with the Internet of Things with sensors to
drive productivity gains moving forward.
•
Don’t Neglect Risk Management. The Thailand floods of 2011 delivered a serious
shock to the semiconductor and hard disk drive supply chains. There will be more critical
events and they are unlikely to repeat themselves. Risk management is not about
preparing for what has already happened, but rather designing a resilient and adaptive
supply chain for events that have not yet occurred.
Copyright © 2014
Supply Chain Insights LLC
Page 12

14. Conclusion
The semiconductor and hard disk drive industries have enjoyed high demand with the rise of
personal computing and now mobile and tablet products. The results have been steady doubledigit sales growth and wide margins. They have bucked a trend. The industry has rebounded
from the recession stronger in margin. This is rare given their downstream location within many
consumer electronics supply chains. However, rising complexity and outsourcing bring new
supply chain challenges. The good news is that the supply chain capabilities within this industry
are strong and ready to meet the challenge.
Company Profiles
Copyright © 2014
Supply Chain Insights LLC
Page 13

15. Other Reports in This Series:
Supply Chain Metrics That Matter: A Focus on Retail
Published by Supply Chain Insights in August 2012.
Supply Chain Metrics That Matter: A Focus on Consumer Products
Published by Supply Chain Insights in September 2012.
Supply Chain Metrics That Matter: A Focus on the Chemical Industry
Published by Supply Chain Insights in November 2012.
Supply Chain Metrics That Matter: The Cash-to-Cash Cycle
Published by Supply Chain Insights in November 2012.
Supply Chain Metrics That Matter: A Focus on the Pharmaceutical Industry
Published by Supply Chain Insights in December 2012.
Supply Chain Metrics That Matter: Driving Reliability in Margins
Published by Supply Chain Insights in January 2013.
Supply Chain Metrics That Matter: A Focus on Hospitals
Published by Supply Chain Insights in January 2013.
Supply Chain Metrics That Matter: A Focus on Brick & Mortar Retail
Published by Supply Chain Insights in February 2013.
Supply Chain Metrics That Matter: A Focus on Medical Device Manufacturers
Published by Supply Chain Insights in February 2013.
Supply Chain Metrics That Matter: A Focus on Consumer Electronics
Published by Supply Chain Insights in April 2013.
Supply Chain Metrics That Matter: A Focus on Apparel
Published by Supply Chain Insights in May 2013
Supply Chain Metrics That Matter: A Focus on Contract Manufacturing
Published by Supply Chain Insights in August 2013
Supply Chain Metrics That Matter: A Focus on the Automotive Industry
Published by Supply Chain Insights in October 2013
Supply Chain Metrics That Matter: A Closer Look at the Cash-To-Cash Cycle (2000-2012)
Published by Supply Chain Insights in November 2013
Supply Chain Metrics That Matter: Third Party Logistics Providers
Published by Supply Chain Insights in December 2013
Supply Chain Metrics That Matter: A Critical Look at Operating Margin
Published by Supply Chain Insights in December 2013
Copyright © 2014
Supply Chain Insights LLC
Page 14

16. About Supply Chain Insights LLC
Founded in February, 2012 by Lora Cecere, Supply Chain Insights LLC is focused on delivering
independent, actionable and objective advice for supply chain leaders. If you need to know
which practices and technologies make the biggest difference to corporate performance, turn to
us. We are a company dedicated to this research. We help you understand supply chain trends,
evolving technologies and which metrics matter.
About Abby Mayer
Abby Mayer (twitter ID @indexgirl), Research Associate, is one of the
original members of the Supply Chain Insights LLC team. She is also the
author of the newly-founded blog, Supply Chain Index. Her supply chain
interests include connecting financial performance and supply chain
excellence, as well as talent management issues and emerging markets.
Abby has a B.A. in International Politics and Economics from Middlebury
College and a M.S. in International Supply Chain Management from
Plymouth University in the United Kingdom. She has also completed a
thru-hike of Vermont’s 280 mile Long Trail, the oldest long distance hiking trail in the United
States. As part of the planning and food prep process, she became interested in supply chain
management when she was asked to predict hunger pangs for the entire three-week trip before
departure. If that isn’t advanced demand planning, what is?!?!
Copyright © 2014
Supply Chain Insights LLC
Page 15